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July 2009 Issue of Wines & Vines
 
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GROWERS' REALITY CHECK

Experts say vineyards can't escape fallout from wine sales decline, but growers can be proactive

 
by Paul Franson, with Jim Gordon
 
 
    HIGHLIGHTS
     

     
  • Seminar founder David Freed polled attendees and reported that just 44% anticipated sales growth this year, the lowest positive response he's recorded. The previous low was 78% last year.
     
  • Among consumers, frugality is in and cheap is chic; chain store sales and value brands offer hope.
     
  • Growers were told they must share the pain: with less demand for high-priced wine, their grape prices must inevitably decrease as well.
     
Growers seeking good news had to listen carefully at the Vineyard Economics Seminar held June 2 in Napa Valley. The symposium naturally focused on how the recession is impacting the grapegrowing business in 2009, and speaker after speaker outlined news and trends that ranged from tepid to terrible. Most did see light ahead, however, and many offered guidance about how to reach it sooner through smart business decisions and vineyard management.

Prior to the seminar, its founder David Freed had surveyed attendees to take the temperature of the vineyard economy. Freed heads the UCC Group that includes Silverado Premium Properties, which holds 8,000 acres of vineyard properties in California's coastal regions and provides related vineyard management.

Freed's numbers told of a dramatic turn toward the negative from last year. While 44% of attendees he polled anticipated growth in sales this year, that's the lowest positive response he's recorded; the previous low was 78% last year and in 2003. Fully 95% of those surveyed said they expect 2011 to be a good year.

Response was a bit lighter than usual, with 45 respondents split between wineries and growers. About 180 people attended the conference, including members of financial and support communities.

Corriea
 
"Trading down has replaced trading up." David Freed, principal of the UCC Group.
PHOTO:Napa Valley Community Foundation
Some of the results from Freed's poll completely flip-flopped from past years. For example, in 2008 respondents saw direct shipping as having the biggest positive effect on sales. This year, value was No. 1, and direct shipping had slipped from the top responses as wineries acknowledged its modest realities.

For questions about how consumer attitudes had changed, health was the leading factor affecting sales in 2008, but it ranked last in 2009. Likewise, "trading up" was in second place last year, and "trading down" was first this year.

There were positive notes, however. Supermarket and chain volume sales were up, though dollar values were lower. For growers, the relatively stable and moderate harvests of the past few years meant that 86% of acreage controlled by survey respondents is under contract for grapes, a positive development. Last year it was tagged at 71%.

One surprise reflected by other speakers, too, is that following years of shortage, Pinot Noir grapes seem to be at or near oversupply because of intensive planting the last few years.

Alternative text
 
"It ain't over yet." Bump Williams, retail marketing expert.
Nielsen data demonstrated that old favorites remain. Cabernet and Merlot combined represent 25% of varietals sold; Chardonnay represents 22%. Even out-of-fashion white Zinfandel holds an 8% market share in supermarkets and chains, though it dropped 4% in 2008, the only varietal other than Syrah that slipped.

One thing that's clear, as every speaker confirmed, is that the low end of the market is growing fastest--a huge turnaround from a few years ago, when wines with prices in the high teens and above were the market stars. The following sections cover highlights of presentations by many, but not all, of the seminar's speakers.

A view from retail

Mostly confirming the responses from growers and wineries, the second speaker outlined the situation from the viewpoint of resellers: It was perhaps even more dismal. Bump Williams, a consultant in the packaged goods industry, reviewed extensive research and interviewed chain-store executives to put together a rather bleak picture of current wine sales.

Consumer confidence reached an all-time low in December 2008, while real estate and retail sales generally experienced declines. Meanwhile, liquidity has become a big issue for individuals and corporations with limited access to capital.

Vine Itti
 
"Sellers think it's 2007, while buyers think it's the '30s." Tony Correia, vineyard appraiser.
And the future holds more bad news, Williams reminded the audience. More consumers expect business conditions to worsen during the next six months, with year-over-year earning declines to continue through 2009.

Meanwhile, the search for value has become fashionable among consumers, so low-priced and value brands are the "hot" segments of the market. "Cheap is chic," said vineyard real estate expert Tony Correia, who also spoke at the seminar.

Consumers are altering their eating and shopping patterns, dining out less, and entertaining and drinking more at home. There's a shift to "value" channels at all levels of the income spectrum. For example: Consumers are turning to larger formats like boxed wines, which offer lower costs per serving.

The American public is embracing frugality for the first time in recent memory. "In just six months," one financial expert told Williams, "we have seen America shift from a 'negative' savings rate to a 3% positive savings rate. What that equates to is $300 billion out of the consumer purchase environment." That was the view of Margaret Keane, the president of GE Capital. "They're saving, not splurging," Williams noted.

Williams also reported a worrisome trend: Wine is no longer considered "hot," so retail merchandisers are replacing the wine displays that once attracted customers to their stores with cheaper products including beer and energy drinks, so patrons won't think the stores are expensive.

Importance of chain stores

It's well known that people are dining out less frequently, and they're spending less on wine in any case. That makes chain-store channels increasingly important to wineries. Williams noted that 84% of all families shop in Walmart each year. "If you're not there, you're in trouble," he told the seminar's sober attendees.

Even casual dining restaurants are hurting. This year, 22 of the top 25 restaurant chains reported diminished sales: Up most is Buffalo Wild Wings, a chain that brags it serves wings, beer and spirits--not wine.

Williams said, "The consumer belt-tightening is not done, either. It ain't over yet." Executives that Williams interviewed didn't see a turnaround in attitudes for at least three--maybe five--years.

Amid all the gloom, however, Williams offered some advice: Focus on chains and local markets (local is in); be smart--and reasonable--about pricing, and remember that brand extensions are less risky than new brands, which are a tough sell. "People are focused on buying what they need, not what they want," he said.

He suggested, "The weak on-premise environment should lead to greater focus on driving at-home consumption. Focus on/create 'entertainment at home' occasions--but on-premise operators need your help (with pricing)."

He recommended seeking opportunities with potential partners, such as those providing food pairing opportunities and take-home meal solutions, even partnering with craft brewers, whom he said may be set for a comeback. And he saw opportunities in private wine labeling.

What's a grower to do?

Alternative text
 
"Sell to buyers who will pay." Glenn Proctor, bulk wine and grape broker for Ciatti Co.
Wine and grape broker Glenn Proctor of Ciatti Co., vineyard appraiser Tony Correia and Honig Vineyard & Winery CFO Tony Benedetti looked at what's ahead for growers. Proctor said the 2009 crop may be bigger than the last three. That prediction, plus the sick economy, has basically stopped sales of bulk wines and grapes for this fall, he said. "The early season buying activity was intermittent in the coast and very active in the Central Valley, but coastal activity slowed around February, as the sales numbers continued to weaken."

He added that Central Valley activity has slowed with the expected large crop, and buyers would rather be short than long. "They're shooting to confirm 70% to 80% of their needs--and big, small, négociants--they're all on the sidelines."

Proctor predicted the market will pick up in July and August, but at a lower price than before this year. "It's tough to sell bulk wine now," he said. "Coastal wines will need to look at prices closer to valley pricing in the future to potentially move some of the wines on the bulk market."

Proctor advised growers, "Keep terms short, sell to buyers who will pay, and maintain relationships where possible."

For growers, the good news was that almost no one is planting, though aging vines will start to experience lower yields. And aside from Pinot Noir and Pinot Gris, very few planted acres are not in full production. He noted, for example, that in 2003, 18% of the 76,000 acres of Cabernet were non-bearing; in 2008, it was only 2% of 75,000. Correia said, "There have been few new plantings in the past three to five years, and few are expected for several more."

Correia reviewed prices, reminding the audience that property values are ultimately tied to grape prices, which are tied to bottle prices. In fact, he repeated this a number of times to keep the audience focused: "Wine prices drive grape prices, which drive land and vineyard prices."

This thought is reflected in land prices plotted against key grape varieties: Cabernet in Napa, Pinot Noir in Santa Barbara and Sonoma. There's a huge range in values, however. In Napa County, for example, top vineyards in prime areas like Oakville, Rutherford and Stags Leap can sell for $350,000 per acre, while the price is nearer $50,000 in outlying areas like Pope and Chiles valleys.

He also reminded listeners: "Markets are based on perceptions, and sellers think it's still booming 2007, while buyers think it's the '30s." Right now, there are fewer sales, fewer buyers and fewer sellers, but the sidelines are crowded and waiting. Correia noted the lifestyle component of vineyard real estate has dropped dramatically, and most buyers of vineyards now are businesses that expect a return.

The winery perspective

As the winery representative on this panel, Honig's Benedetti pondered the question raised by other speakers, "What is a normal market? Is this the new era of wine? Will consumers continue to drink value wines, or will we ever return to the heady days of the recent past?"

He reminded attendees, "In 2007, times were good. Generally, wineries were experiencing record sales, and American consumption of wine reached record levels on a per capita basis. Was this the Old Normal?"

But in December 2007 the recession began, though of course no one knew it. "Wine sales for the first three quarters of 2008 were like driving a Ford Pinto--you stepped on the gas and just didn't go anywhere. Normal seemed to be flat."

However, in the fourth quarter of 2008, sales seemed to fall off a cliff. So far this year, Benedetti has heard anecdotal tales of sales well below 2007 and 2008 levels. "Is this the New Normal?" he asked.

Beginning in late 2008, "premium" brands experienced declining sales, and the decline continues today. "Value" brands are faring better than premium brands, and the under-$10 brands seem to be doing just fine. Wineries are working harder to limit declining sales by making more phone calls to distributors and spending more time in the markets.

Distributors reduced their inventory levels in 2008. Reducing floor inventory equates to a corresponding one-tim e drop in winery sales. And distributors are concentrating on brands with "pull through" by dropping brands that aren't selling well and not taking on new brands.

Vine Itti
 
"It's time to share the pain." TONY BENEDETTI, Honig Vineyard & Winery CFO
Meanwhile, it's clear that the average selling price for wine is dropping, but Benedetti said that prices for Napa Cabernet grapes rose 13.2% last year. He noted that this can't continue. Wineries can't pay more for grapes and then sell their wine for less long term. "It's time to share the pain," he said.

He added, "Inventory management is paramount. Wineries must keep production in line with sales." He suggested reducing grape purchases, canceling grape contracts (if terms allow), reselling grapes at a loss instead of making wine from them to protect grower relationships, selling bulk wine or, if possible, just selling more cases. "A winery must execute these strategies and remain profitable (or at least limit losses) to stay in business."

Wineries must figure out how to survive in the next year or so. Broker Proctor put it succinctly: "You have to survive before you can prosper. Develop unique strategies: for the short term, survival. For the long term, prosperity."

State covets water

It's a new world of water, at least for growers in California's North Coast counties, according to speakers in another session at the Vineyard Economics Seminar. The State Water Resources Control Board has for the first time in 30 years issued a general warning that growers need to be alert about their water use. At the same time, the SWRCB has stepped up enforcement of water-use regulations in this region.

Signs that the state wants to actively intervene in agricultural water use to protect fish and other users of scarce water supplies are unmistakable, said Paula J. Whealen, an authority who has worked in this field for more than 25 years. Whealen is a principal at Wagner & Bonsignore Engineers in Sacramento, Calif.

Whealen explained the differences in the three sources of growers' water, and which ones are regulated. Surface water in streams and rivers, and subterranean flow (underground streams, basically) are both regulated by the state. Growers need either riparian rights or an appropriation from the state to use these sources. The third category, ground water, has not been regulated, but Whealen warned that the state may be moving toward regulating it, too.

Whealen described the draft regulation proposed by the SWRCB, which would affect the five North Coast counties of Marin, Sonoma, Mendocino, Humboldt and Napa. The proposal is aimed at users with pending or new applications for surface and subsurface flow. It sets new bypass requirements on every new water diversion, whether or not salmon or other "salmonids" like steelhead trout are present. It also requires retrofitting of existing, unpermitted diversions to put bypasses and monitoring in place. She said, "It does not balance fishery protection against agricultural, municipal, domestic and industrial water users."

She and two other speakers discussed the aftermath of a flashpoint incident in spring 2008, when vineyard frost protection in the Russian River watershed was found to be partially responsible for the deaths of at least two fish when stream flows dipped 2 inches below a healthy level for wildlife. The incident brought requests from the public and government that use of water for vineyard sprinkler frost protection be banned outright, which outraged many growers.

Veteran vineyard manager Pete Opatz of Silverado Premium Properties and Laurel Marcus of the Fish Friendly Farming group explained how grapegrowers jumped into action following this incident. They've joined task forces along with other stakeholders in water use and conservation to present research and, they hope, guide the process toward a more favorable outcome for growers. Opatz said some promising research already completed shows how growers can use much less water while battling frost, by separating smaller vineyard blocks and using sprays at intervals rather than continuously on sub-freezing nights.

Questions vs. answers

While growers, vintners, and their bankers and lawyers left the seminar with an expert and up-to-date assessment of vineyard economics, many questions remained. The 18th Wine Industry Financial Symposium, another in the series of meetings sponsored by the Wine Industry Symposium Group, will be held Sept. 14-15. By then, we should know far more about the harvest, the economy and how they will affect the wine market.

Young growers' tips for saving dollars
 

 
Three young California vineyard professionals shared ideas for saving money and conserving natural resources during a panel at the Vineyard Economics Seminar on the New Economics of Grapegrowing. The panelists were Craig Ledbetter, vice president of operations for Vino Farms in Lodi; Dave Komar, director of vineyard operations for Bacchus Vineyard Management in Fulton; and Garrett Buckland, vice president of viticulture for Premiere Viticultural Services in Napa. Here are a number of their ideas, in brief:

Dave Komar
Vine Itti
 
Switching to drip irrigation can save both money and water.
PHOTO:United States Department of Agriculture
• In organic vineyards, delaying shoot thinning and using a grass cover crop can help control vigor. Letting shoots grow longer before removal means they will have absorbed more of the plant's energy.
• Try watering only the top of a sloping vineyard (where it's driest) and skip the bottom portion (usually wetter) to save water.
• Soil nutrition in organic vineyards often does not need to be applied annually. Every second or third year might work.

Garret Buckland
• It's OK to skimp on aesthetics to save money. Rows can have occasional weeds, slightly ragged hedging, etc., without affecting quality. Exceptions include the rows immediately adjacent to winery drives and visitor facilities.
• Track data about your vineyard and cultural practices. Then it's imperative to use your results with the appropriate software to plan future activities more efficiently.

Craig Lebetter
• Convert tractors to biodiesel. It costs $.35 more per gallon than diesel, but growers can get a $.50 per gallon tax credit. B20 biodiesel fuel, which is 80% regular diesel, cuts emissions by 50%.
• Look into the EQIP program sponsored by the USDA NRCS in various counties to save money on tractor replacement (along with the Carl Moyer program); switch to drip from flood irrigation; use integrated pest management; improve dust control.
• Try mechanical minimal pruning. In the Central Valley and Central Coast, it costs $.14 per vine versus $.32 per vine normally.
• Mechanical leaf-pulling--by vacuum--costs $35 per acre while manual leaf-pulling costs $150 per acre.

J.G.
 
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